Cash In on the Plummeting Dollar With This Stock

Last week, the dollar fell to a 14-year low against the Japanese yen. Two days ago, the Wall Street Journal reported that central banks across the globe are frantically trying to hold their currencies down as the dollar continues its slide.

The news is ubiquitous -- the dollar is doomed, and America's mighty currency is on a slippery slope downward. In the wake of such pessimistic news, investors are left wondering whether they're overexposed to international stocks, or whether they should be even more diversified.

Before we answer that question, let's take a look at why the dollar is definitely going to drop, and how you can best position yourself to take advantage of the fall.

I've fallen and I can't get up
A few weeks ago, the dollar sagged to a 15-month low against a basket of major currencies. According to analysts, the outlook for 2010 seems to be just as dreary as things are now.

Why?

On Nov. 4, the Federal Reserve announced that the target federal funds rate will be set at 0%-0.25% for "an extended period." With interest rates that low, foreign investors will continue borrowing in the U.S. and investing abroad, where they can obtain higher returns. Additional investment abroad pushes up the currencies of foreign markets, thus keeping the value of the dollar down. Until interest rates rise, which doesn't seem likely to occur any time too soon, investors will continue investing elsewhere, and the dollar will keep sinking.

In addition, emerging markets have recovered from the financial collapse much more quickly than most developed markets. While some domestic stocks like priceline.com (Nasdaq: PCLN  ) and salesforce.com (NYSE: CRM  ) have seen impressive returns year to date, emerging-market stocks such as Baidu (NYSE: BIDU  ) , China Automotive Systems, and Petrobras (NYSE: PBR  ) have, as a group, outperformed. Look at the return of these indices in comparison with the S&P 500:

Region

Return since Dec. 31, 2008

Return +/- S&P 500

China (SSEB)

101.9%

80.3%

India (BSE)

74.7%

53.1%

Brazil

76.9%

55.3%

Taiwan (TWI)

67%

45.4%

The rapid influx of capital into emerging markets such as China, India, and Brazil will push up their currencies as asset prices tend to increase over time. This will also keep the dollar down.

What's the dollar to do?
Nobel Laureate and author Paul Krugman has said, "Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable." George Soros agrees. So does Warren Buffett. I'm no expert, but those guys certainly know a thing or two.

A weak dollar helps U.S. exporters by making their goods more competitive, which will inevitably boost domestic production for those companies that don't buy the majority of their raw materials abroad. This will likely stimulate the economy and improve unemployment.

A weak dollar will also help us rein in the enormous trade deficit we've been carrying for years.

Although there are definitely varying viewpoints on the pros and cons of our trade deficit, it's certainly better to borrow less from abroad to fund consumption at home. Any sort of deleveraging is a good sign for our economy.

In other words, the question at hand isn't whether or not the dollar will continue to decline, or whether or not that decline is a good thing. The question that matters to you is, how can investors take advantage of the situation?

Lower greenback, higher returns?
Since it looks like developing markets will continue their spectacular rise, you might benefit by investing directly in foreign equities, or multinational companies that generate substantial revenue abroad.

However, there's an even better way to capitalize on the fall of the dollar: Purchase small-cap U.S. companies with international exposure.

While large-caps like PepsiCo (NYSE: PEP  ) and Yum! Brands (NYSE: YUM  ) , which earn more than 30% of their revenues abroad, should see nice bumps in sales, small or midsize companies will benefit disproportionately, because increases in exports will have a greater effect on their bottom lines.

To that end, you'll want to look for small- or mid-cap companies with at least 20% of revenue from abroad, and limited debt, so they'll be able take advantage of international expansion.

For instance, check out Dynamic Materials (Nasdaq: BOOM  ) -- a Colorado-based company that provides specialized explosion-welded plates and services. Dynamic Materials earns more than 60% of its revenue abroad, from Brazil to China to Norway -- and it's operating with a paltry 25% long-term debt-to-capital ratio. It's perfectly placed to take advantage of a falling U.S. dollar.

Our Motley Fool Hidden Gems analysts are constantly looking for small-cap stocks that are poised to outperform. While significant foreign revenue certainly isn't the only criterion our team looks for in a stock, at least six of the companies in our real-money portfolio -- yes, the Fool puts its money where its mouth is -- have greater than 40% international revenue.

If you'd like to see what they are -- in addition to our other small-cap investments -- just click here for a 30-day free trial. There's no obligation to subscribe.

Fool contributor Jordan DiPietro owns no shares of the companies listed above. Dynamic Materials is a Motley Fool Hidden Gems pick. Baidu and salesforce.com are Rule Breakers recommendations. Priceline.com is a Stock Advisor choice. PepsiCo and Petrobras are Income Investor selections. The Fool owns shares of Dynamic Materials. The Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (77)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 04, 2009, at 4:34 PM, heron28 wrote:

    I think it is naive to list only the potential benefits

    of a weaker dollar. It WILL also be inflationary, and

    since we MUST import oil and a few other things,

    which will get more expensive in dollar terms, I wonder whether the supposed reduction in our

    trade deficit is going to come from.

  • Report this Comment On December 04, 2009, at 4:58 PM, dinksta wrote:

    Well, with interest rates so low the bond market should be yielding a little higher interest payments. I've never invested in bonds before, though.

  • Report this Comment On December 04, 2009, at 10:34 PM, davidkarro wrote:

    Why would Dinksta want to buy bonds if interest rates are going up? If you pay $100 for a bond paying, say 2%, you can look forward to a return of $2.00 a year. If interests rise, as Dinksta thinks they will, the bond will still pay just $2.00 in dividends, and will no longer be worth $100.

    Assume, for example, that interest rates have risen to 4% when you want to sell. That means buyers can buy $100 bonds that gives them $4.00 back a year. Why would they be willing to pay $100 for a bond that gives back just $2.00 a year. If you want to unload the bond, you will have to cut its price.

    If Dinksta thinks interest rates are going up, now is not a good time to buy a bond, unless dIinksta intends to hold it until it matures or thinks interest rates will have dropped back when the time comes to sell.

  • Report this Comment On December 05, 2009, at 12:24 AM, xetn wrote:

    "Nobel Laureate and author Paul Krugman has said, "Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable."

    There is nothing natural about the falling dollar; it is a direct result of the Fed's monetary inflation and pushing down interest rates to below the market rate. All of this effort for bailouts, stimuli, and as an invisible tax (price inflation) desirable for debtors.

    The Fed's actions are the primary method of paying for all the government's programs instead of risking the ire of the taxpayers by passing tax increases.

    By the way, the primary reason for the financial meltdown is the Fed's actions coupled with its fractional-reserve banking system and government interventions.

  • Report this Comment On December 05, 2009, at 9:59 AM, lrecap wrote:

    As noted, giving a one sided picture is not beneficial to your members. Your objective is to thry to capitalie on the falling dollar - - so IF you can, state that - - but stay out of the politics of the situation. Giving away totally free money can not be a good thing for the US. It is not meant to revitalize the US. One needs to realize that the objective of the administration is to move quickly toward socialism (government control of GDP - eliminate citizen freedoms). If Soros agrees with something, then you DO NOT WANT IT, and Soros has been a significant contributor to Obama's election (and behinnd a number of europe's socialistic policies). The dollar does not have to be free to recover. The longer they keep the dollar that low, the longer it will take the US to recover. lre

  • Report this Comment On December 06, 2009, at 4:18 AM, dinksta wrote:

    Hey davidkarro, this is to your response. I don't have a lot of knowledge in the bond market mind you, but my belief was that when interest rates drop(or stay as low as the article implies), Coupon value, or yield, will be more favorable to the investor currently holding the bond, not the issuer of the bond of course. When interest rates rise, especially with callable bonds, the issuer usually buys them back because they know they can get them back at a lower price before they actually have to pay par value plus the yield that has now gone up in the investor's favor? Like I said, I'm not too familiar with bonds, though. Now, I know where your coming from, your saying the interest rate currently is at it's low. So, the interest rate can only go up? I wasn't implying you should purchase bonds at the moment, that wouldn't be smart. But, rather, investors that are currently holding bonds that are close to maturity should, or will, be reaping the benefits of where our interest rate is at now. That's what I meant by my article response. But, I joined the Fool so I can learn from you guys how to be a better investor. So, any feedback to help me out is really appreciated gentleman..

  • Report this Comment On December 06, 2009, at 4:38 AM, dinksta wrote:

    Sorry, I meant the issuer's of callable bonds buys them back when interest rates drop, not rise. I re-read after posting. After 3 or 4 Budweisers I shouldn't write on here... ;)

  • Report this Comment On December 07, 2009, at 11:00 AM, cmdDC wrote:

    The important thing to figure out is whether or not these companies buy their raw materials at home or abroad. If they buy abroad, they'll be paying more for inputs and so they won't see that big a difference on the bottom line. But I believe BOOM is a nice pick in that regard.

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